Tag Archives: economics

Recently I bought a cabin bag from shop.ca (i.e., a bag to put all your electronics in that you can bring into a plane cabin). Like most all shop.ca purchases, there was a lot of coupon/credit stacking that went into my purchase. This one was not as amazing as my Kobo Aura purchase but still pretty good.

$89.99

Original price

-$36.00

Discount off original price

+$7.02

Tax

-$15.00

Shop.ca coupon

-$13.33

Shop.ca credit

+$0.00

Shipping (free)

$32.68

Total

Plus, there was a 7.5% eBates cash back which I suppose would be $2.45. However, I never received my eBates cash back from my first purchase AND this credit is not showing up after a couple of days, so I’m going to assume that eBates doesn’t work for me.

But the most interesting thing was when I received the shipment, they included an invoice. Except, it wasn’t my invoice but the invoice to shop.ca from the supplier. So I know that the bag cost Shop.ca $43.19 (at 20% discount from $53.99) + HST = $48.80. Which means that that Shop.ca made -$16.12 in selling me this bag (perhaps even less because someone had to pay for shipping, although that is possibly the supplier)

I enjoyed reading Freakonomics wayyy back in 2006 but reading current event-type books had lost its appeal to me the last few years. So I kind of ignored Superfreakonomics when it came out. Not that I didn’t know about it, because at that time I was also following the Freakonomics’ authors blog (then on the NYTimes family of blogs). Eventually I stopped following the blog too, although I forget why now (probably because I lost interest).

I picked up Superfreakonomics a few weeks back to pass the time on a couple of doctor visits and finished it earlier this week. It was surprisingly short, and I didn’t enjoy reading it very much. My main problem with the book was that it jumped between various aspects of a topic too frequently, seemingly every few paragraphs. I’d much rather read an in-depth chapter about a certain field of study and learn its insights, rather than read through tangentially related, and superficial discussions on a field. In fact, I felt like I was reading a series of blog posts that were loosely tied together!

The topics themselves were relatively interesting (prostitutes) and current (climate change) and I found that the book tried to educate the reader on basic economic terminology. That’s actually a great goal, but a negative externality (which is defined in Superfreakonomics in case you forgot from econ 101) of this is that the book ends up reading well to the general reader (i.e., someone picking it up for a flight) but was not very engrossing for me.

What’s better than watching reality TV? Watching the train wreck that is reality! Today’s episode is about the country of Greece. Here is the teaser:

In just the past decade the wage bill of the Greek public sector has doubled, in real terms—and that number doesn’t take into account the bribes collected by public officials. The average government job pays almost three times the average private-sector job. The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year. Twenty years ago a successful businessman turned minister of finance named Stefanos Manos pointed out that it would be cheaper to put all Greece’s rail passengers into taxicabs: it’s still true. “We have a railroad company which is bankrupt beyond comprehension,” Manos put it to me. “And yet there isn’t a single private company in Greece with that kind of average pay.” The Greek public-school system is the site of breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked, Finland’s. Greeks who send their children to public schools simply assume that they will need to hire private tutors to make sure they actually learn something. There are three government-owned defense companies: together they have billions of euros in debts, and mounting losses. The retirement age for Greek jobs classified as “arduous” is as early as 55 for men and 50 for women. As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on. The Greek public health-care system spends far more on supplies than the European average—and it is not uncommon, several Greeks tell me, to see nurses and doctors leaving the job with their arms filled with paper towels and diapers and whatever else they can plunder from the supply closets.

That’s from the very beginning of the article and it gets better and better (i.e., more train wrecked)!

Recently I noticed a strange, and irrational thing about spending money. Let’s say you want to go to the movies, it’ll probably cost you about $10 and that’s not really a big deal because $10 probably isn’t a lot of money to you. You get 2-3 hours of immediate enjoyment and maybe some more afterwards if the movie was influential or life-changing. So in terms of entertainment, $10 is not that much.

For $50-$60 you can buy a video game which will last you about 10-20 hours, although it may not have much life beyond that, but at least you can consume it at your own pace.

The weird thing happens when I come across XBLA games. They typically go for 400 or 800 MSP which translates $6.46 or $12.91 in Canadian dollars. Those aren’t large sums of money, and usually the games that interest me will give me > 5 hours of entertainment. But I find myself very hesitant to spend my MSP on these games. I can think of three reasons for this:

I’m still of the mindset that games are overpriced. Granted I don’t typically buy > $50 games, but usually wait until they are on sale for $10-$20. Or best yet, free.

The fact that these games are not charged in hard currency but MSP messes with my idea of the actual cost of the games.

The slight difficultly (i.e., restriction in supply) to actually get MSP is a barrier. If I run out, I have to go out to the store and buy points in 1400 or 2800 buckets.

What strikes me as odd is that I find XBLA much more convenient than regular games (because you don’t need to get up and switch discs!) so one would think that I would want to buy a bunch of fun XBLA games and just play those over and over.

It irks me that when shopping in Asia markets (i.e., markets within Asia), you have to bargain a heck of a lot in order to not be ripped off. Whenever I ask the price of something, I have to be ready to do some mental math to come up with an offering price. Maybe it is just unbelievable to my Canadian sensibilities that someone would be willing to sell something below 50% of the “sale” price (although at least my Chinese sensibilities and dealings with Rogers et al realize that there can be some unbelievable margins in industries).

It is fascinating though, that this game is built into shopping in certain cultures. While I know it happens in Chinese culture, I somewhat associated my knowledge with my background. Although it is not surprising that this also occurs in societies where there is a large gap between rich and poor (especially if the rich are transient). Here are some observations of bargaining from other countries:

Did you know, one of the reasons we’re in this recession is because of everyone’s favorite university – the University of Waterloo! Thanks to a couple of degree’s granted by UW, the Gaussian Copula function was invented.

Enter Li, a star mathematician who grew up in rural China in the 1960s. He excelled in school and eventually got a master’s degree in economics from Nankai University before leaving the country to get an MBA from Laval University in Quebec. That was followed by two more degrees: a master’s in actuarial science and a PhD in statistics, both from Ontario’s University of Waterloo. In 1997 he landed at Canadian Imperial Bank of Commerce, where his financial career began in earnest; he later moved to Barclays Capital and by 2004 was charged with rebuilding its quantitative analytics team.

His statistics degree helped him to come up with this:

It was a brilliant simplification of an intractable problem. And Li didn’t just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation numberâ€”one clean, simple, all-sufficient figure that sums up everything.

One of the things you learn in grad school is that correlation is often seen as a raison d’etre when it should be considered carefully.

Li’s copula function was used to price hundreds of billions of dollars’ worth of CDOs filled with mortgages. And because the copula function used CDS prices to calculate correlation, it was forced to confine itself to looking at the period of time when those credit default swaps had been in existence: less than a decade, a period when house prices soared. Naturally, default correlations were very low in those years. But when the mortgage boom ended abruptly and home values started falling across the country, correlations soared.

Netbooks are so cheap, they’re reshaping the fundamental economics of the PC business. Last October, British mobile-phone carrier Vodafone offered its customers a new deal: If they signed a two-year contract for high-speed wireless data, Vodafone would give them a Dell Mini 9 netbook. That isn’t quite the same as getting a free computer; after all, Vodafone bills users $1,800 on that two-year contract, so it can afford to throw in the netbook. (In December, RadioShack offered a similar deal: a $99 Acer Aspire netbook for anyone who signed up for two years of AT&T’s 3G service.)

What these deals signal is that computers are developing the same economics as mobile phones. Hardware is becoming a commodity. It’s difficult to charge for. What’s really valuableâ€”what people will pay through the nose forâ€”is the ability to communicate.

I think I’ll buy one or two netbooks this year. My laptop is aging and I want something light to carry around or couch surfing. Although I’m a bit torn about getting a SSD or a real hard drive. On the one hand, I want a large storage capacity to offload my photos to on-the-go; but SSD is cheaper.

Thinking about pirated DVDs makes me want to dig up my Economics course notes; too bad I threw them away. Anyways, I was curious to see that if selling DVDs for $2 each can result in a profit, how much money were they pulling in when they were going for 3 for $20? For brevity, I’m not going to recalculate the costs, even though they were probably higher. I’ll just say that it costs $1 per DVD, which means that at that time, they were making over 500% profit!

As an aside, now I see a lot of random stores selling pirated DVDs as a means to boost their bottom line. You can buy DVDs with your Chinese buns, or get a hair cut and pick out some DVDs. These places probably go through a middleman to get their DVDs, and I’m guessing that after the middleman markup, wholesale cost for each DVD is $1. Which makes selling DVDs a great side business.

But back when they were going for $7 each, I’d expect the (true) demand was lower. If you wanted to watch 10 movies a month, maybe you would only buy 3 at PacMall, and the remaining you would rent download or skip. Now, for the same expenditure, you can watch all 10! I’m going to assume that most people operate with a fixed entertainment budget though, and not attempt to buy every movie they want to watch.

While the influx of supply lowered the cost, I think people get caught up in the package deals, so they end up buying movies that they didn’t really want to watch in order to fill up their deal. I guess the DVD vendors get a slightly larger volume to offset the lowered costs, but we as consumers get the better deal for sure since we’ve lowered their profit margin to a much more reasonable 200%.

We were at a dry goods store in PacMall on the weekend and the owner mentioned that she had to move since she could no longer afford the $6000/mth rent for the place. I assume that that cost includes all utilities, insurance, etc., but not inventory and of course salary. Adding a reasonable income of $4000/mth (which actually sucks for having to work 30 days in a month), that means a store has to clear $10k in profit a month in order to be sustainable. How do those clothing stores and hair salons do it?

It seems like they can’t really, and it feels as though a DVD store springs up every time one of them closes. There are so many that the competition has the price down to $2 a DVD! Are they profitable? Even at $2 a DVD, they are making a huge profit on each DVD sold. Here are some fermi calculations.

You can buy a 10-DVD duplicator for under $1000 at Canada Computers (hmm I wonder why there is a consumer market for these things?). Let’s say over the lifetime you market 20,000 discs so the average cost per disc is 5¢. You can probably duplicate in your spare time (i.e., over dinner or while watching TV) or get your lazy teenager/babysitter/housewife/cousin to switch around the discs when necessary. You’ll also need to somehow find the source copy of the movies and download them. Another monkey job that someone tangential can do. I’ll add another 5¢ overhead for the miscellaneous costs such as electricity. The DVD material itself should not be more than 20¢

You’ll also need some packaging, like a DVD case (10¢), a printed label, maybe a sticker on the DVD to identify what it is (for your benefit really since you will have piles of discs), and a little bag for your label and disc. 15¢ in total. Everything needs to get shipped so I’ll add 10¢ per disc. There are some other costs to running the store, you’ll need a DVD player, a TV and some shelves. I’d estimate your startup cost at $1000, or another 5¢ per DVD over the life of 20,000. The grand total comes to 65¢ in costs per DVD, which means over 200% profit even when selling for $2 a disc!

In order to make $10k a month, you’ll need to sell almost 7400 DVDs. That’s 740 customers that by $20 worth of DVDs each visit, or about 175 a week. On a weekend, I think they can sell (at least) $20 every 10 minutes, which is 48 customers in 8 hours. On the weekdays, let’s say they can find 1 customer every 30 minutes, which is another 16 customers per day. That’s enough to fill our quota and be sustainable!

When I read about plans to purchase Bear Sterns for $2/share, losing 95+% of the worth, I immediately thought of you. No, I’m not aware of any extra-curricular activities of yours in the mortgage-backing business, but I suspect that you may have been suckered into the same black hole of greed that has siphoned away many financial companies’ cash. Of course, it would be to a lesser extent because I can only sign my name so many times before the remainder on the big credit limit number becomes a doughnut.

I don’t live in fear though, because I live for tomorrow! I know you, my big greedy friend, will decide to make that number even bigger. It’s people with friends like you that can buy a fifth plasma TV for the upstairs bathroom, and a second snowblower to clear the lawn for an ice rink. But I feel bad for you my friend, it’s easy to be blinded by greed and oblivious to the unstable footing beneath you. Because of that, I solemnly pledge to rip each and ever check you send me (including the three I just received in the mail — thanks!) and not use your money for gratuitous means.

In The Economics of War, the author mentions an example, that has nothing to do with war, about people’s driving behaviours. He talks about people who race through a yellow light during a rush hour, only to be stopped before they clear the intersection. This impedes the flow of traffic in the other direction until their light turns yellow, and a couple of cars in their direction race the light and obstruct the intersection again. So on and so forth. The author argues that the last few cars are acting economically sound because it lets them reach their destination a little bit quicker, at the expense of slowing everyone else down. Basically your micro vs macro argument.

I see examples of these quite frequently when driving, especially in rush hour where I think you need to be aggressive or be a chump. But I noticed a situation which is counterintuitive in that putting one’s interests ahead of society’s actually helps everyone out.

On my drive home, the onramp to the highway has to merge the cars from two directions, with my direction being the lane that actually ends up on the highway. Now some cars that approach, merge at the first sign of a space; which is good for society because they end up waiting in their assigned space in line. Other cars however, accelerate ahead until the very end of the lane before merging in, thereby jumping several spaces in the queue even though they were side-by-side with you at the beginning. This is beneficial for them because they get home sooner, but it pushes everyone else back one space.

But here’s the interesting thing that’s wrong with this analysis. There will always be people who wait until the last minute to merge, because it’s the most beneficial for the individual. So the people who are merging early, in actuality, are allowing the cars behind them to jump ahead of them and merge closer to the front of the line. Now if you’re behind all of these cars, and watching cars merge early; instead of being behind x cars, you end up being behind x+y cars, which is bad for the society of cars waiting to go on the highway. So always merge at the last minute unless there is no traffic.